Orange Ltd. is considering purchasing a new manufacturing plant that costs $500,000. The manufacturing plant will generate revenues of $150,000 per year for ten years. The operating costs needed to generate these revenues will total $75,000 per year. The manufacturing plant will be depreciated on a straight-line basis over ten years to zero. Orange Ltd.’s tax rate is 30 percent, and its cost of capital is 10 percent.
(a) What is the net present value of this project?
(b) Should the company approve this project? Explain why or why not. (Show all of your calculation).
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